Thursday, April 28, 2011

Market Value vs Replacement Costs

Market Value vs. Replacement Cost is something that we in the insurance business discuss a lot with property owners. Depending on the economic conditions there can be a variation between Market Value and Replacement cost. Since the current economic conditions have caused such a discrepancy we at Fey Insurance thought it might be a good time to explain the difference between the two terms.

Market Value is the amount that a house is worth on the real estate market. It is what you can buy or sell the house for. As we sit in the middle of a depressed real estate market, the value of homes is down from years past. When you hear a mortgage company or title company talk about getting an appraisal they are always talking about Market Value because the lending institution is mainly concerned with what they could sell the asset (building) for.

Replacement Cost is concerned with a different valuation of a building. Replacement cost deals with the amount of money it would take to rebuild a structure using the same materials at the same location with the same style of construction. Because this is based on building materials and cost of labor it doesn’t have the large swings that Market Value has. For example, in today’s poor economic conditions, material costs have stayed pretty level meaning the Replacement Cost of a building has stayed relatively flat.

So how do these two forms of valuations play out in numbers? Let’s take an example home that is a brick structure, has four bedrooms/ two baths and is about 2000 square feet. A house like this in our area may be listed on the real estate market for about $250,000 (depending on the school district, location to town, etc) and will probably sell for about $235,000 (which would then be the Market Value). This same structure would have a different value if we used Replacement Cost. In our area the same structure just mentioned would cost about $135.00 per square foot to rebuild if a fire or tornado totally destroyed it. Take the $135.00 per square foot and multiply that by the 2000 square feet and you come up with a value of $270,000 (which would then be the Replacement Cost).

When it comes to banks and lenders they care about Market Value ($235,000 in our example) where the insurance companies, since they will have to pay to have the home rebuilt after a fire or tornado, cares about the Replacement Costs ($270,000 in our example).

So next time you see your homeowner policy or commercial building policy and look at what they are insuring your structure for don’t say to yourself, “I couldn’t sell my building for that” because the amount you are thinking of is the Market Value. Insurance companies are only interested in the Replacement Cost because they want to make sure they are able to rebuild your property and make you just as you were prior to the fire or tornado.

Thursday, April 21, 2011

Deductible Basics

When a covered insurance claim happens the insured, in many cases, will be responsible for the first few dollars of most losses. The amount they are responsible for is called the deductible. More often than not, deductibles are only associated with property damage of the insured’s own possessions whether that is a vehicle that was damaged or damage to their contents, their buildings or even their loss of income. On some occasions you may see deductibles on liability claims but not in many.

Deductibles can come in many different forms on insurance policies. You can have a given dollar amount, say $500. Often times you see this type of deductible on home insurance or business property insurance. Some deductibles might be a percent of the loss like 1% or 10%. Sometimes you will see this type of deductible on a home or business but many times it will be associated specifically with earthquake coverage. Deductibles can be vanishing deductibles. As the insured racks up years of no losses, their deductible gradually drops each year until eventual it is $0.

In most cases the deductible is per claim. This means that each time you have a claim you pay a deductible. It isn’t like your typical health insurance policy where you have an out of pocket deductible for the year and once you meet that limit you are done with the deductible. In property and casualty, if you have a $500 flat per claim deductible you will pay $500 each time you have a claim no matter how many you have in a given year.

Deductibles can be a helpful cost savings tool. They can be raised to help drop premiums but the insured needs to understand that by raising deductibles they have taken on a bit more of the burden of possible claims.

It is important for insureds to understand what their deductible is so that they can be prepared to financially meet its requirement if a claim were to happen. I mention this more in connection with a percentage deductible. The insured should know if the percent is on the cost of the claim or on the coverage limit. For example, if a person had a $200,000 house and an insurance policy with a 5% deductible (on the coverage limit) it would be best to know that you have a $10,000 deductible before you have a claim. Someone that doesn’t know their policy might think that it is 5% per the cost of the claim.

Deductibles are just one of many facets to an insurance policy. Be sure to familiarize yourself with your policy and policy coverages and consult your independent insurance when ever you have any questions.

Monday, April 18, 2011

Auto Liability Basics

Auto insurance liability limits come in a few different forms as well as in many different levels. The two main forms of auto insurance liability are “Split Limits” and “Combined Single Limit”. One main thing to first understand about auto insurance liability limits is that these limits are what’s used by the insurance company to pay out on your behalf the damages that you cause to someone’s body and or property. Auto insurance liability limits are not used to pay money toward your injuries or property damage. Those coverages are auto insurance medical payments coverage, comprehensive coverage, collision coverage and uninsured/underinsured motorist coverage. We will not be addressing those items in this blog post.

Split Limits have three different ceilings or maxes that the insurance policy will pay out. Those three different maxes are “bodily injury per person”, “bodily injury per accident” and “property damage”. Often you will see insurance policies with split limits of $250,000 bodily injury per person and $500,000 bodily injury per accident and $100,000 in property damage. What this means is that if you cause an auto accident the most that one individual will get for their bodily injuries is $250,000 from your insurance policy. If there are multiple people in the other party’s vehicle then the most the policy will pay out is $500,000 in bodily injury to all involved. Accidents that you cause will usually result in property damage to others and $100,000 is the max that the above example limits will pay for someone else vehicle or property.

Combined Single Limit still covers bodily injury and property damage but there is only one lumped together limit for the policy. For example if you have a $500,000 combined single limit policy than the most the other party will receive for their bodily injuries (no matter how many people are in the vehicle) and property damage that you cause is $500,000. There is not a per person limit sublimit nor a property damage sublimit.

There are many different levels of auto insurance liability limits you can have. Each state has a minimum which means you at least have to have the amount they require in order to legally operate a vehicle. This limit is usually very low and in order to best protect your assets and help restore people that you cause injury and damage to we recommend much higher limits of insurance. Obviously the higher the limits of insurance you purchase the more money the insurance policy will cost but extra money you spend could be the difference in protecting your assets after a large claim or have the possibility of losing some of your assets.

Thursday, April 7, 2011

Protecting Your Customer's Sensitive Information

Businesses subject to the Financial Modernization Act of 1999 (also know as the Graham-Leach-Bliley Act) are required to comply with provisions that protect personal and financial information to maintain the trust and confidence of their customers.

Companies should develop a written information security plan that describes, among other things, the specific ways their employees should protect consumer information.

Sloppy handling of personal and identifying information can be devastating to a small business. A breach of security of this information can lead to personal identification theft of customers, and can open the company up to liability. The loss of reputation alone can destroy an otherwise successful company. So how can your company take steps to protect your customer’s information? Here are five steps that you might consider implementing:

1. Create a paper trail that documents your operations. Once you know where the trail starts and ends, you can analyze each step and develop a plan ensuring security of information. Limit access to sensitive data when possible and dispose of sensitive documents by shredding.

2. Electronic data should be protected with passwords and encryption.

3. If you use third-party services in the process of taking care of your customers, make sure they adhere to strict privacy standards. Ask for a copy of their privacy guidelines.

4. Regularly communicate with employees regarding your company’s privacy activities. Reference compliance within your employee handbook.

5. Have a plan to guide you if there is a breach of security. Know who to contact, what data to protect and how long it should take to plug the gap. You should also have a plan for notifying affected customers in the event of a breach.